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Honorable Mention

Posted on December 9, 2020 by -

Retirement plans cope better this year than in 2008-2009

More than 90% of employers will make their retirement plan contributions this year—a much better performance than in the 2008-2009 financial crisis, according to a new survey of retirement plan sponsors by the Plan Sponsor Council of America, a part of the American Retirement Association.

Nonetheless, 11.5% of plans with fewer than 50 participants changed their matching contribution. That’s more than three times the number of organizations with 5,000 or more participants, the survey showed.

Four times as many employers suspended or reduced their match during the 2008-2009 crisis than during the 2020 crisis, said Hattie Greenan, research director for PSCA, part of the American Retirement Association. 

In 2008 companies that suspended their matching contributions experienced a decrease in plan participation to a much greater degree (72.9 percent of companies) than those that did not change their matching contribution (14.4 percent of companies), as well as a decrease in participant deferral rates.

“I think many [plan sponsors] went into this period expecting it wouldn’t last all that long, likely muting the potential impact on retirement savings,” said Nevin Adams, chief content officer and head of research for the American Retirement Association, in a release. “Mitigating factors, such as the recent broad-based government assistance in the form of the Payroll Protection Program, and have almost certainly helped as well.”

Relying on provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act for permission to do so, more than half of the plans surveyed are allowing coronavirus-related distributions (CRDs). Nearly a third are allowing increased plan loan amounts. Half of plans are allowing participants to pause payments on existing loans that are due through December 1, 2020 and defer payments for up to a year. This is more common at large companies (73.3% of plans) versus smaller ones (23.1%).

One in four plan sponsors reported a recent increase in plan loans, up from 13% of plan sponsors reporting an increase when survey five months ago. Nearly 40% of plans noted an increase in withdrawals since last summer. If only 10% of the roughly 600,000 employers suspended or reduced their contributions, the long-term impact on retirement security would be significant, the PSCA said.

PSCA surveyed plan sponsors in early November 2020 regarding their response to current conditions. The survey received responses from 139 companies that sponsor a 401(k) plan for employees. The full report is available at https://www.psca.org/research/cares_snapshot3

Public pensions have shown “great resiliency” this year: Milliman

The estimated aggregate funded ratio of the nation’s 100 largest public pension plans is 70.7% as of June 30, 2020, down from 72.7% reported in 2019, according to the results of the 2020 Public Pension Funding study by Milliman, the global consulting and actuarial firm. The study assesses the expected real return of each plan’s investments.

The aggregate Total Pension Liability reported at the last fiscal year-ends (for most plans, this is June 30, 2019) was $5.27 trillion, up from $5.07 trillion as of the prior fiscal year-ends, Milliman found. Between the 2019 and 2020 PPFS, over one quarter of the plans (28) lowered their interest rate assumptions, with 90 of the plans now reporting assumptions of 7.50% or below.

“While the impact of the COVID-19 pandemic on public pensions’ financials is not fully clear, plans in this year’s PPFS experienced a huge swing in the estimated combined investment return, from -10.81% in Q1 2020 to 10.72% in Q2. More concrete evidence of the pandemic’s impact will be available once next year’s financial statements are published,” Milliman said in a release.

“Beyond market volatility, which has affected plan assets, we expect that furloughs and shutdowns as a result of the COVID-19 pandemic will impact pay levels and employee contribution amounts, while pressure on government budgets will make it hard to free up dollars to contribute to the plans to shore up their funding,” says Becky Sielman, author of the funding study.

“But public plans have, by and large, shown great resiliency. They are designed and financed to function over a very long time horizon, and can take short-term setbacks in stride.” The full Milliman 100 Public Pension Funding Study can be found at http://www.milliman.com/ppfs/.

TruChoice to distribute Jackson National annuities to RIAs

TruChoice Financial Group, LLC, an insurance products distributor, and Jackson National Life Insurance Company(Jackson) have announced distribution deal that will bring Jackson’s no-commission annuities to fee-based advisers through TruChoice’s Outsourced Insurance Division, according to a release this week.

“The OID distribution model utilizes a product-agnostic, multi-carrier methodology to allow financial professionals to manage client assets and protection needs while working with FINRA-registered and insurance-licensed OID Specialists,” the release said.

Like Jackson, TruChoice has a presence on FIDx, which powers the Envestnet Insurance Exchange and MoneyGuide Protection Intelligence. Three of Jackson National’s fee-based products are now available to RIA firms and IARs through TruChoice’s OID platform: Perspective Advisory II and Elite Access Advisory II (both variable annuities) and MarketProtector Advisory, a fixed indexed annuity.

SPARK Institute elects new chair and vice-chair

The SPARK Institute, a trade association of retirement plan recordkeepers, announced that Ralph Ferraro, SVP, head of Product and Solutions Management, Lincoln Financial, has been elected chair of its Governing Board.

He succeeds Rich Linton, EVP Group Distribution and Operations, Empower Retirement, who has completed his term. Linton has been the chair since 2017 and will remain as an active member of the board.  Kevin Collins, head of Retirement Plan Services, T. Rowe Price, has been elected as vice chair.

The SPARK Institute’s governing board includes twelve firms: AIG, Ameritas Life Insurance Corp., Ascensus, BlackRock, Empower Retirement, FIS Global, J.P. Morgan Asset Management, Lincoln Financial Group, Prudential Retirement, SS&C, T. Rowe Price and Wells Fargo Institutional Retirement.

Pandemic shows importance of 401(k) “sidecar” accounts: Morningstar

Observing that many retirement plan participants have felt compelled to tap their 401(k) savings this year for hardship withdrawals or loan, Morningstar’s head of policy research argues in favor of creating so-called sidecar accounts that workers can use for emergency withdrawals while leaving their long-term savings intact.

In “Harnessing the Power of Defaults to Save for Emergencies,” Aron Szapiro writes, “Sidecar accounts probably would not provide enough of a cushion for many workers affected by COVID-19. A large scale social safety net, like unemployment insurance, needs to be available for massive macroeconomic disruptions.

“But the government’s COVID-19 response and workers’ behavior in response to it, shows the promise of sidecar accounts for more pedestrian emergencies… Many people would likely accept a sidecar program alongside their 401(k) as their default savings setup. These accounts, once filled from default contributions, would be largely preserved for bona fide emergencies.”  

Drawing from 401(k)s represents a significant drag on workers retirement savings, according to the US Government Accountability Office. The GAO estimated that around $70 billion leaks out of the retirement system every year. “Workers would not tap their 401(k) accounts if they absolutely did not have to, given the evidence we see from the post-CARES act withdrawals,” Morningstar has found.

Solash takes on new responsibilities at AIG

AIG Life & Retirement, a division of American International Group Inc. (NYSE: AIG), today announced that Todd Solash, CEO of its Individual Retirement business, will also lead the company’s Life Insurance business, effective immediately.

As CEO, Individual Retirement and Life Insurance, Solash will be responsible for the division’s strategic agenda. He joined AIG in 2017 from AXA US where he was head of the firm’s individual annuities business.

Before that he was a partner within the Insurance practice at Oliver Wyman, a management consultancy. Solash has bachelor’s degrees in Finance and Chemical Engineering from the University of Pennsylvania and is based in Woodland Hills, California.

© 2020 RIJ Publishing LLC. All rights reserved.

A List of Joe Biden’s Tax-related Campaign Proposals: Crowe

Posted on December 2, 2020 by -

Crowe, a global public accounting, consulting and technology firm based in the US, has created a list of President-elect Joe Biden campaign proposals to “provide insight into how individual, corporate, energy, employment, retirement and healthcare taxation could support his non-tax policy agenda.”

“We expect a new administration will focus on providing additional pandemic relief and stimulus, however, changes in tax policy could be on the horizon,” said Gary Fox, managing partner of tax services at Crowe, in a release. “Even if major tax legislation is unlikely, the executive branch has regulatory tools at its disposal to impact tax policies.”

Below are key aspects of Biden’s campaign tax proposals, which provide a window into tax policy changes that could occur in his administration.

Individual tax
  • Raise the top marginal tax rate 2.6% for income over $400,000
  • Remove the tax rate preference for capital gains and qualified dividends for income over $1 million by taxing them at ordinary rates
  • Keep the 3.8% net investment income tax
  • Support the provision in the House-passed Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) that eliminates the cap on the deduction for state and local taxes for 2020 and 2021
  • Limit total itemized deductions so the reduction in tax liability per dollar of deduction does not exceed 28%. Taxpayers in tax brackets higher than 28% will have limited benefit of itemized deductions
  • Phase out the 20% pass-through deduction for income over $400,000
  • Beginning with the 2020 tax year, increase the child tax credit to $3,000 ($3,600 for children under 6), make it refundable and allow for advance payment of the credit
  • Raise the child-care credit from the current maximum of $1,200 to $8,000 for one child and to $16,000 for two or more children with income up to $125,000 per year
  • Expand the earned income tax credit to workers older than 65 who do not have a qualifying child
  • Enact a $5,000 tax credit for family caregivers of people who have certain physical and cognitive needs
  • Enact a refundable, advance-able tax credit of up to $15,000 for first-time homebuyers
  • Enact a renter’s tax credit, designed to reduce rent and utilities to 30% of income for low-income taxpayers
  • Exclude forgiven student loan debt from taxable income
  • Eliminate stepped-up basis on transfers of appreciated property at death
  • Raise the estate tax to 2009 levels (possibly a 45% rate and an acceleration of the reduced exemption amount)
Corporate tax
  • Raise the corporate tax from 21% to 28%
  • Require C corporations with more than $100 million in book income to pay the greater of normal corporate tax liability or 15% of book income
  • Eliminate all deductions for expenses to advertise prescription drugs
  • Increase the depreciable life of rental real estate
  • Eliminate the deferral of capital gains from like-kind exchanges for real estate
  • Establish incentives for opportunity zone funds to partner with nonprofit or community-oriented organizations and jointly produce a community benefit plan for each investment – require reporting, public disclosure of community impact and Treasury oversight
  • Enact a 10% offshoring surtax (on top of the current 28% rate) on U.S. company profits from overseas production for sale in the U.S. and for call centers and services serving the United States
  • Double the global intangible low-taxed income rate to 21% and close certain loopholes
  • Implement anti-inversion regulations and penalties
  • Deny deductions for moving production and jobs overseas
  • Impose sanctions on countries that “facilitate illegal corporate tax avoidance and engage in harmful tax competition”
  • Establish a Made in America tax credit for revitalizing existing closed or closing facilities, retooling any facility to advance manufacturing competitiveness and employment, bringing production jobs back to the U.S., expanding job-creating efforts or expanding manufacturing payroll
  • Expand and make permanent the new markets tax credit
  • Establish the manufacturing communities tax credit, and fund the credit for five years to reduce the tax liability of businesses that experience workforce layoffs or a major government institution closure
  • Expand the work opportunity tax credit to include military spouses
  • Expand the low-income housing tax credit
  • Establish a workplace childcare facility tax credit of up to 50% of an employer’s first $1 million in costs for qualified on-site childcare
Energy tax
  • Make the electric motor vehicle tax credit permanent, repeal the per-manufacturer cap and phase out the credit for taxpayers with income above $250,000
  • Expand tax deductions for energy retrofits, smart metering systems and other emissions-reducing investments in commercial buildings
  • Reinstate the solar investment tax credit
  • Reinstate tax credits for residential energy efficiency
  • Eliminate certain tax subsidies for oil, gas and coal production, including expensing exploration costs and percentage depletion cost recovery rules
  • Enhance tax incentives for carbon capture, use and storage
  • Establish tax credits and subsidies for low-carbon manufacturing
Employment, retirement and healthcare tax
  • Tighten the rules for classifying independent contractors by increasing penalties for misclassification
  • Raise payroll taxes for workers with more than $400,000 in earnings by increasing the maximum threshold from $137,700 to $400,000 over time
  • Increase tax preferences for middle-income taxpayer contributions to 401(k) plans and individual retirement accounts (IRAs)
  • Replace the deduction for worker contributions to traditional IRAs and defined-contribution pensions with a refundable tax credit
  • Provide automatic enrollment in IRAs for workers who do not have a pension or 401(k)-type plan
  • Offer tax credits to small businesses to offset the costs of workplace retirement plans
  • Support informal caregivers by allowing them to make catch-up contributions to retirement accounts, even if they’re not earning income in the formal labor market
  • Increase tax benefits for older Americans who purchase long-term care insurance using their retirement savings
  • Establish a refundable tax credit that would reimburse companies as well as not-for-profit organizations for the extra costs of providing full health benefits to all of their workers during a period of work-hour reductions
  • Increase eligibility for the premium tax credit by raising eligibility limits and increase the amount of the credit so eligible taxpayers can enroll in more generous health plans
  • (c) 2020 Crowe.com.

Honorable Mention

Posted on December 2, 2020 by -

Aon PEP (pooled employer plan) opens in January with two clients

Aon plc (NYSE: AON) registered its pooled employer plan (PEP) with the Department of Labor this week and will launch it Jan. 1, 2021. Aon, a $47.7 billion global professional services firm, provides risk, retirement and health solutions. It expects more than half of US employers to merge their traditional 401(k)s into pooled employer plans during the next decade, according to a report.  

PEPs were made possible by the passage of the SECURE Act last year. So far Mercer and Principal Financial, among large retirement plan providers, have also announced PEPs. 

The Aon PEP will start the year with two employers in January and is scheduled to add three more clients through April. These initial employers are from a diverse mix of industries that include aerospace, chemical, music production, pediatric medicine and petroleum. “Participants will benefit from higher performing, more efficient 401(k) plans,” an Aon release said.

“Based on overall value, we predict that many more employers will transition to PEPs in the coming years,” said Paul Rangecroft, North America retirement practice leader for Aon. “The benefits of such a move—lower costs, reduced time commitment from corporate staff, improved governance and high-quality retirement planning options—will be difficult to match in a single employer solution.”

Aon believes the economies of scale in pooled employer plans will help lower record-keeping fees, investment management fees, and other costs for firms. Participants may also have easier access to investment tools and education services.

From the employer perspective, pooled employer plans are expected to reduce staff time dedicated to plan management, compliance and governance (i.e., elimination of many tasks such as government filings, plan audits, etc.). “Pooled employer plans will also reduce fiduciary and litigation risks,” the release said.

“The Aon PEP provides the efficiency and scale of a pooled plan, while maintaining individual employer autonomy to define matching and other contribution levels, and various key plan design features,” said Rick Jones, partner for Aon’s Retirement Solutions.

Life/annuity industry suffered sharp drop in net income in first nine months of 2020: AM Best

Net income in the US life/annuity industry fell 57% to $12.7 billion in the first nine months of 2020, compared with the same period in 2019, according to a new Best’s Special Report, First Look: 9-Month 2020 Life/Annuity Financial Results.

The data comes from companies’ nine-month 2020 interim statutory statements received as of Nov. 23, 2020, representing an estimated 94% of total industry premiums and annuity considerations.

According to the report, total expenses increased by 3.2% in the first nine months of 2020. Death, annuity and other incurred benefits rose by 9.2%. These increases negated a 5.8% decline in surrender benefits, a 12.4% drop in general and other expenses, and a decline of $13.4 billion in transfers to separate accounts.

The industry’s total income remained steady, but pretax net operating earnings, coupled with the increase in expenses, fell by 60.4% from the prior-year period to $13.6 billion. A decline in tax obligations and a rise in net realized capital gains mitigated the impact slightly, resulting in industry net income of $12.7 billion for the first nine months of 2020, compared with $29.4 billion in the same prior-year period.

The industry’s bond holdings as a percentage of total cash and invested assets continued to decline during the first nine months of 2020, as cash and short-term investments rose by 38.2% and other invested assets were up by 15.1% from the end of 2019.

Aon partner for Retirement Solutions Rick Jones sent the following statement to RIJ in response to two questions: Will PEPs mainly aggregate existing 401(k) plans or expand coverage to employers without plans, and will PEPs contribute to the inclusion of annuities in qualified plans?

“We predict that many single employer plans will transition into the Aon PEP, but we also foresee an opportunity for new employers to offer 401(k) benefits to employees who never before received a retirement benefit. New employers will be attracted to PEPs because they will reduce time and energy dedicated to plan management, compliance and governance. PEPs will also will reduce fiduciary and litigation risks.

“Moving forward, we believe PEPs will provide robust platforms for retirement plan innovations, including secure forms of lifetime income, better recognition of diversity, equity, and inclusion initiatives, and the best use of behavior analytics to improve retirement outcomes. We are in regular conversation with industry groups and legislators in Washington on these points.

“ We also hope and believe the PEP concept can be expanded to gig workers in the future. The “SECURE 2.0” proposals in Washington include PEP coverage for 403(b) plans as well, and we believe that would be another fantastic development for retirement security. There are many markets that have insufficient or no solutions at all, and we believe PEPs provide a great opportunity to close that gap.” 

Morningstar to integrate ESG factors into research

Morningstar, Inc., has begun formally integrating environmental, social, and governance (ESG) factors into its analysis of stocks, funds, and asset managers, the Chicago-based information giant said in a release.

Morningstar equity research analysts will “employ a globally consistent framework to capture ESG risk across over 1,500 stocks,” the release said. Analysts will identify valuation-relevant risks for each company using Sustainalytics’ ESG Risk Ratings, which measure a company’s exposure to material ESG risks. The analysts will then evaluate the probability that those risks will materialize and the associated impact on valuations.

Results from this research will inform Morningstar’s assessment of a stock’s intrinsic value and the margin of safety required before the stocks receive a Morningstar Rating between five stars and one star. Morningstar acquired Sustainalytics, an ESG ratings and research firm, in July 2020. 

Morningstar manager research analysts will analyze the extent to which strategies and asset managers are incorporating ESG factors as part of its new Morningstar ESG Commitment Level evaluation. The analysts will assess the analytics and personnel committed to each strategy and the extent to which the strategy incorporates those resources into the investment process.

“To perform the evaluation of asset managers, analysts will consider how clearly the firm has articulated its ESG philosophy and policies, and the degree to which it has driven those policies through its culture and investment processes. The ESG Commitment Level evaluation of strategies and asset managers will follow a four-point scale of Leader, Advanced, Basic, and Low,” the release said.   

Transamerica and Aegon launch defined benefit plan service

Transamerica, in partnership with Aegon Asset Management, has launched a new defined benefit plan management service — Transamerica DB Complete. The solution packages services typically outsourced to unrelated third party vendors, including plan administration, asset management, consulting services, and actuarial, non-advisory support.

Transamerica DB Complete will draw on the expertise of Transamerica Retirement Solutions, Transamerica Retirement Advisors (for fiduciary advisory services), and Transamerica affiliate Aegon Asset Management (for fixed income).

PenChecks Trust launches online payment service for retirement plans

PenChecks Trust, an independent provider of outsourced benefit distribution services and Automatic Rollover/Missing Participant IRAs, has launched Amplify, an online payment processing service that third-party administrators (TPAs), plan sponsors, recordkeepers, financial institutions and plan participants can use to manage regular retirement benefit distributions.

Amplify is “a holistic solution for retirement payment/benefit needs, combining intuitive navigation with robust functionality for better processing and tracking of benefits,” according to PenChecks director of product Kelsey Wolstencroft. Amplify also includes security upgrades for heightened data security. 

Other new or upgraded benefits include: a dashboard with more relevant information, multiple formats for uploading data to the portal, the ability to create and manage recurring payments, and a guided process for submitting benefit elections payment instructions. Amplify can also help plan participants track the status of benefit elections and distributions.

American Equity completes $337 million equity sale to Brookfield; will repurchase more shares

American Equity Investment Life Holding Company (NYSE: AEL) announced today that, following Hart-Scott-Rodino approval, it has closed an initial equity investment of 9,106,042 shares at $37.00 per share from Brookfield Asset Management Inc. as part of a previously announced deal.

With this investment and the accelerated share repurchase and other share repurchases (described below), Brookfield now owns about 9.9% of American Equity stock and will receive one seat on the company’s board of directors. Sachin Shah, managing partner and chief investment officer of Brookfield, has joined American Equity’s board, which has expanded to 14 members.

American Equity also announced that it has entered into an accelerated share repurchase (ASR) agreement with Citibank, N.A., to repurchase an aggregate of $115 million of American Equity’s common stock. Since starting its first share repurchase program on October 30, the company has already repurchased more than 1.9 million shares for $50 million in the open market. Combined with the ASR announced today, the company has substantially offset dilution from the equity issuance to Brookfield.

The company intends to continue to repurchase shares in 2021 under its $500 million share repurchase authorization until Brookfield owns a 9.9% equity interest in American Equity, with further repurchases after American Equity receives the insurance regulatory approvals required for Brookfield’s purchase of additional equity interest above 9.9%.

On October 18, 2020, American Equity announced a set of commercial business arrangements, through reinsurance, with Brookfield. As part of this strategic partnership, Brookfield entered into an equity investment agreement with the company to acquire up to a 19.9% ownership interest in the common shares of American Equity.

This equity investment includes the initial purchase of a 9.9% equity interest at $37.00 per share, and a second purchase, expected to close in the first half of 2021, that with the initial purchase will equal up to a 19.9% equity investment (at the greater value of $37.00 per share or adjusted book value per share (excluding AOCI and the net impact of fair value accounting for derivatives and embedded derivatives). The second equity investment is subject to finalization of certain reinsurance agreement terms, receipt of applicable regulatory approvals and other closing conditions.

Under the ASR agreement, American Equity will receive an initial share delivery of approximately 3.5 million shares, with the final settlement no later than March 31, 2021. The total number of shares to be repurchased will be based on the volume-weighted average price of American Equity’s common stock during the term of the transaction, less a discount and subject to customary adjustments.

Principal promotes senior managers in Latin America and Asia

Principal Financial Group has promoted regional presidents Roberto Walker (Latin America) and Thomas Cheong (Asia) of Principal International to its executive management team. Principal also announced the retirement of Luis Valdés, CEO and president of Principal International.

International markets and the global customer are growing in significance for Principal, the company said in a release. Walker and Cheong will report to Dan Houston, chairman, president, and CEO of Principal.

Walker, senior vice president and president of Principal Latin America, and Cheong, senior vice president and president of Principal Asia, will become executive vice presidents as part of the changes, effective Jan. 1, 2021.

Walker joined Principal in 1996 and has led Latin America for Principal International since 2011. Cheong joined Principal in 2015 as vice president of North Asia for Principal International and took over leadership responsibilities for the entire Asia region in 2019.

Valdés will retire March 31, 2021, after 26 years with Principal. He led Principal International as president and CEO the past nine years – driving significant growth in Latin America and Asia through acquisitions in emerging markets. Valdés will serve as chairman of the Principal International board for two years following his retirement.

Alerus to acquire Retirement Planning Services Inc.

Alerus Financial Corporation (“Alerus”) (NASDAQ: ALRS) has agreed to acquire Retirement Planning Services, Inc. The all-cash transaction is anticipated to be immediately accretive to Alerus’ GAAP earnings per share, adding an estimated $0.08 in 2021 and $0.13 in 2022.

The transaction represents Alerus’ eleventh acquisition in the retirements and benefits vertical since 2003. The transaction is expected to be completed December 18, 2020, and will increase Alerus’ assets under administration/management to approximately $31.5 billion. Terms of the transaction will not be released.

RPS, which does business as RPS Plan Administrators and 24HourFlex,  provides retirement and health benefits administration for more than 1,000 plans, 48,000 plan participants, 300 COBRA clients, and 10,000 COBRA members. RPS is based in Littleton, Colorado, which expands Alerus’ geographic footprint to the Rocky Mountain region.

“A substantial portion of the premium paid will be allocated to a customer account intangible and amortized up to 10 years, contributing to a cash-GAAP earnings difference while restoring the tangible equity utilized to complete the acquisition,” an Alerus release said.

© 2020 RIJ Publishing LLC. All rights reserved.

Retirement Clearinghouse receives investment from billionaire John C. Malone

Posted on December 2, 2020 by -

John C. Malone, chairman of Liberty Media Group, has purchased an unspecified minority stake in Retirement Clearinghouse LLC was (RCH), the 401(k) account portability firm. RCH is majority-owned by Robert L. Johnson, chairman of the RLJ Companies and founder of Black Entertainment Television. 

John C. Malone

RCH previously announced that Alight Solutions will lead the nationwide launch of the RCH Auto Portability Program. The program  is designed to help plan participants move their savings to their new employers’ plans when they change jobs.

“Doing so enables them to avoid cashing out, paying taxes, and being subject to penalties. Every year, $92 billion leaves the U.S. retirement system when job-changing participants prematurely cash out their 401(k) savings accounts, and pay related taxes and penalties, based on data from the nonpartisan Employee Benefit Research Institute (EBRI), the retirement services industry’s gold-standard research provider, an RCH release said.

Black and Hispanic workers are said to be hurt most by this phenomenon—63% of Black and 57% of Hispanic workers cash out upon job-change, according to EBRI. Low-income and younger workers also have high cash-out rates. Half of workers earning $20,000 to $30,000 and 44% of workers ages 20 to 29 cash out within a year of switching jobs.

Robert L. Johnson

The major cause of cash-out leakage is the lack of seamless plan-to-plan asset portability in the U.S. retirement system, according to RCH. RCH defines “auto portability” as “the routine, standardized, and automated movement of a worker’s 401(k) savings account from their former employer’s plan to an active account in their current employer’s plan.”

The U.S. Department of Labor (DOL) cleared the way for plan sponsors and recordkeepers to adopt the technology enabling auto portability by issuing regulatory guidance in July 2019 and November 2018.

RCH completed the first fully automated, end-to-end transfer of retirement savings from a safe-harbor IRA into a worker’s active account in July 2017, on behalf of a large plan sponsor in the health services sector. Since then, more than 1,600 workers have consented to have their former-employer plan accounts transferred into their current employers’ plans.

© 2020 RIJ Publishing LLC. All rights reserved.

Are Target Date Funds the Perfect Vehicle for ‘In-Plan’ Annuities?

Posted on December 2, 2020 by -

The inclusion of lifetime income products and alternative investments into target-date funds could potentially help asset managers and life insurers improve long-term outcomes for plan participants and help themselves stand out in a TDF market dominated by a handful of large players (Vanguard, Fidelity, T. Rowe Price, American Funds and JP Morgan), according to Cerulli Associates.

“Specific provisions in the SECURE (Setting Every Community Up for Retirement Enhancement) Act are designed to facilitate the inclusion of lifetime income products (e.g., annuities) in 401(k) plans and other DC plans that do not typically feature lifetime income products,” according to the latest issue of Cerulli Edge—U.S. Asset and Wealth Management Edition.

According to the report, most (92%) of firms expect managed payout options and annuity allocations to be incorporated into future target-date fund series. The market volatility of the first quarter of 2020 may also serve as a catalyst for lifetime income adoption by DC plans. Nearly two-thirds (63%) of target-date managers say this period of heightened market volatility will increase client demand for guaranteed investments. Providers of lifetime income products should leverage market downturns to illustrate their downside protection benefits, Cerulli suggests.

In addition to annuitization, the use of alternative investments such as private equity funds may change. A Department of Labor (DOL) information letter released earlier this year offers regulatory guidance related to the use of private equity funds within professionally managed strategies (e.g., target-date funds, target-risk funds) that may serve as a DC plan’s qualified default investment alternative (QDIA).

“Although the letter represents a key step toward giving private equity a larger presence within the DC product landscape, adoption will likely occur at a gradual pace as providers look to craft products, educational materials, and messaging for the DC market,” said Cerulli senior analyst Shawn O’Brien in a release.

In the coming months, Cerulli expects plan sponsors and retirement plan providers to engage in more detailed exploratory discussions regarding the inclusion of private equity in multi-asset-class products such as target-date funds. Providers looking to incorporate allocations to private equity should remain aware of the demands and constraints of the DC market.

“Private equity funds are typically characterized by infrequent pricing events, low liquidity, relatively high management fees, and complex investment structures,” O’Brien said. “Conversely, the DC market—litigious in nature—is notoriously fee-sensitive, and the product landscape is dominated by simple, transparent, low-cost investment vehicles.”

Providers must clearly demonstrate to plan fiduciaries how allocating to a certain private equity strategy within a professionally managed product can improve long-term outcomes for plan participants on a risk-adjusted, net-of-fees basis. Asset managers and consultants/advisors looking to offer professionally managed products that allocate to private equity should be prepared to educate plan sponsors on the fundamentals of private equity investing.

“It may take time for many plan fiduciaries to gain a sense of comfort with private equity investments, and therefore, thorough educational and informational engagements may be a necessary precursor to adoption in a DC market where private market investments are rare,” O’Brien said.

© 2020 RIJ Publishing LLC. All rights reserved.

Take ‘AIM’ at Retirement Income Goals

Posted on December 1, 2020 by -

The Asset to Income Method (AIM) tackles retirement financial planning in a strategic way through fundamental principles. AIM consists of creating a structured financial mindset that is based on fundamental investment and risk pooling principles. Individuals who employ AIM can construct a financial plan they can count on throughout their retirement. This framework will take into account major future unknowns such as life span and investment returns.

Bruno Caron

Some of the major advantages of employing AIM include control, ease of execution, ability to manage unknowns, avoiding negative consequences of longevity risk and shifting the traditional dilemma of “spending rate vs. probability of ruin” to “spending rate vs. expected bequest.”

Here we present two hypothetical, illustrative and practical examples that will evaluate the tradeoff of lifetime income and bequest through the AIM. Case I assumes a typical portfolio with a fair value of $1 million, including all financial vehicles. Case II will illustrate the impact of the purchase of lifetime income on each component.

Case I

In Case I, the portfolio consists of traditional asset classes such as fixed income, equities and real estate. It also includes the retiree’s main home as well as lifetime income: a small defined benefit plan and Social Security. It does not include a SPIA. Finally, it has a small emergency fund.

Fixed Income

The client’s portfolio of bonds is worth $150,000 and yields 3%. This may be invested in the form of the aggregation of a few bonds or it can be held within a fund. Regardless, the plan should involve retaining the bonds until maturity while periodically spending the coupons.

Selling or buying bonds could be done opportunistically, depending on change in need or appetite but such potential sell is not designed to cover living expenses. Further, as these securities mature, individuals can reassess their appetite for each specific class. That way, retirees can leave the face amount as a bequest and the coupons generated from these securities can be used as ongoing income.

Equities

The client’s portfolio of stocks is worth $150,000 and the dividend yield is 2%. This may be invested in the form of the aggregation of a few stocks or it can be held within a fund. Regardless, the plan should be to hold on to shares forever and periodically spend the dividend.

Selling or buying stocks could occur opportunistically, depending on changes in need, appetite or market conditions. However, buying and selling is not designed to occur to fund expenses. That way, retirees can leave shares as a bequest and the market value of these shares can be used as a current estimate for such an inheritance.

While not a guarantee, the current market value of assets can serve as an order of magnitude of bequest and income. Both value of assets and income can fluctuate over time.

Real Estate

The client’s real estate portfolio is worth $100,000 and yields 5%. This may be invested in the form of the aggregation of shares in a real estate fund or direct ownership of a portion of a building held as an investment generating revenues. Regardless, the plan should be to hold on to the property and periodically spend the investment income.

Selling or buying ownership in the property may be done opportunistically and depending on change in need or appetite but not to provide for expenses. That way, retirees can leave the property as a bequest and the market value of these properties can be used as a current estimate for such an inheritance. While not a guarantee, the current market value of properties can serve as an order of magnitude of bequest and income. The income generated from this real estate investment can be used as revenue. This example could apply for various other investments, including family or side businesses.

As for a retiree’s home, assuming the mortgage is paid off, the assumption is that no revenues are generated from the main residence, although some do rent their main residence from time to time. It is further assumed that the residence will be left as a bequest.

Public Old Age Pension Program

The client’s public old-age pension program pays $1,750 per month, hence $21,000 per year. Using the proxy income annuity payout of 7%, the estimated the value of this benefit is $300,000. It is important to note that the $300,000 fair value is an estimation of the value of the benefit; it is not a market value or a cash value as these benefits are usually not tradable. This benefit ceases when the retiree passes away and the income generated from this benefit is ongoing income.

Private Pension

The client’s private pension pays $145.83 per month, hence $1,750 per year. Using the proxy income annuity payout of 7%, the estimated the value of this benefit is $25,000. This benefit is assumed to cease when the retiree passes away — unless there is a  spousal survivorship benefits — and the income generated from this benefit is ongoing.

Case II 

Assuming the retiree is healthy, the question in Step 3A above becomes: is the combination of an estimated bequest of $650,000 and recurring yearly income of $35,250 a good combination? Let’s assume the answer is no, as income is too low and bequest can be sacrificed.

The course of action could be to increase lifetime income. In this illustrative example, we will look at the impact of decreasing assets by $100,000 (decrease equities by $50,000 and decrease fixed income by $50,000) towards the purchase of a $100,000 SPIA. Here is the impact of these transactions:

 

These simple examples illustrate the mechanics of how lifetime income increases recurring income and decreases legacy over a full portfolio, using the AIM.

Striking the right balance between the income and bequest is a question of preference and need. Lifetime income is the vehicle that helps achieve this balance. Again, the AIM is not meant to be rigid and a guarantee of bequest and recurring income; rather it gives an order of magnitude and a framework for retirees to navigate and recalibrate needs and goals over time from a position of strength.

These illustrative examples broaden the discussion, but individuals should discuss and assess their specific situations with one or more financial professionals in order to evaluate actual asset classes, benefit values, tax implications and personal situations on an ongoing basis.

These examples are not meant to encompass specific nuances of every asset class; fair value, payout rate, ongoing income estimate and current bequest estimate are subject to change continuously and need to be recalibrated frequently, based on personal situation, market conditions and risk appetite, to name a few variables.

Bruno Caron is a Senior Financial Analyst at AM Best. Before AM Best, he held prior roles as an Equity Research Associate at Jefferies and CEO and Founder of Survival Sharing. He also held roles at New York Life and Willis Towers Watson.

© 2020 Bruno Caron, FSA, MAAA. All rights reserved.

This British fintech plans to invade US DC biz

Posted on November 26, 2020 by -

Smart Pension plans to offer its pension administration platform to Dutch pension funds and pension asset managers, according to IPE.com. The UK-based fintech, which launched in 2014, sees opportunity in the upcoming switch to a defined contribution (DC)-contract in the Netherlands.

Smart, one of the UK’s largest providers of workplace pensions through the Smart Pension Master Trust, announced earlier this year it was planning to expand to the US and Australia.

Over the past few years, Smart has secured funding from Natixis IM, JP Morgan, LGIM and Australian administrator Link Group to secure a “rapid international expansion,” said Dan McLaughlin, director International at Smart. Smart is not planning to launch a pan-European pension product (PEPP) in the near future, though McLaughlin said it could provide services to companies launching such a vehicle.

The company’s DC-platform currently serves the insurance companies New Ireland Assurance and Zurich, and has just concluded a new contract with an American company, added McLaughlin.

Smart’s platform consists of several components: the administration platform itself and its underlying software; the collection of pension contributions; and the paying out of pensions.

Through an app, the platform offers an overview to members of their existing pension pot, the level of their expected pension and the option to choose an investment profile. Incoming premiums are automatically being invested in investment funds.

The first draft of the new Dutch pension law is expected before Christmas.

© 2020 RIJ Publishing LLC.

Treasury Nominee Janet Yellen (the Un-Steve Mnuchin)

Posted on November 26, 2020 by -

If Janet Yellen, Joe Biden’s nominee for Treasury chief, is confirmed by the US Senate, she would be the first female in that role and a key member of the Biden team—which so far includes a woman vice-president, and female nominees for Director of National Intelligence and United Nations ambassador.

The only prior individual to have led both the Treasury and the Federal Reserve—Yellen was Obama’s Fed chair—was William Gibbs McAdoo, who was the first Fed chief (December 1913 to August 1914).

Yellen brings an academic economist’s perspective to the job rather than a Wall Street perspective. As Fed chief, she was known as an interest rate “dove;” she’s more inclined toward maintaining employment (with low rates) than stamping out inflation (with high rates).

In another sign of pro-labor sentiment, she co-authored (with her husband, Nobel economist George Akerlof) wrote “Efficiency Wage Models of the Labor Market,” which offers rationales for the efficiency wage hypothesis in which employers pay above the market-clearing wage, in contradiction to neoclassical economics.

Yellen is likely to try to reverse her predecessor’s decision, reported by Bloomberg News this week, to move hundreds of billions of dollars from a Covid-related lending program to Treasury’s general fund:

Treasury Secretary Steven Mnuchin will put $455 billion in unspent Cares Act funding into an account that his presumed successor, former Federal Reserve Chair Janet Yellen, will soon need authorization from Congress to use.

The money will be placed in the agency’s General Fund, a Treasury Department spokesperson said Tuesday. Most of it had gone to support Federal Reserve emergency-lending facilities, and Mnuchin’s clawback would make it impossible for Yellen as Treasury secretary to restore for that purpose without lawmakers’ blessing.

Democrats swiftly criticized the move, with Bharat Ramamurti, a member of the congressionally appointed watchdog panel overseeing Fed and Treasury Covid-19 relief funds, saying “the good news is that it’s illegal and can be reversed next year.”

… Mnuchin insists that he is following the letter of the law in sunsetting the Fed’s Cares-related lending programs. He said that many markets are no longer in danger of seizing up and don’t need aid beyond next month, when the programs are scheduled to expire.

“For companies that are impacted by Covid — such as travel, entertainment and restaurants — they don’t need more debt, they need more PPP money, they need more grants,” Mnuchin said in an interview last week.

Yellen has been described as a Keynesian economist, which refers to the ideas of John Maynard Keynes, a British economist (1883-1946) who advocated changing the monetary system to fight the unemployment and deflation that followed the First World War in Britain. Though in favor of free trade, Keynes opposed the laissez-faire economic philosophy of the late 19th century.

His 1919 book, “The Economic Consequences of the Peace,” foresaw the blowback from demanding more reparation payments from Germany than it could afford after losing WWI. His ideas influenced US policy until the inflation of the 1970s (after Nixon “closed the gold window” in 1971 and OPEC raised oil prices in 1973), when monetarists like Milton Friedman and supply-side economists like Arthur Laffer gained influence.

It remains to be seen how Yellen would work with Donald Trump’s Fed chair, Jay Powell. Powell and Mnuchin disagreed last week over policy related to mitigating Covid’s damage to the US economy. According to a November 19 Bloomberg News opinion piece:

In what might be an unprecedented public spat between two of the nation’s most prominent economic leaders, Mnuchin sent a letter to Powell on Thursday that said he would let certain emergency lending facilities created by the Coronavirus Aid, Relief, and Economic Security Act expire on Dec. 31, citing what he saw as “congressional intent.” Moreover, he requested that the Fed return almost $200 billion of unused funds to the Treasury, which would “allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds.”

The Fed responded almost immediately with a short statement: “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”

Yellen’s tenure as Fed chair was noted for job and wage growth, both of which occurred while she maintained low interest rates, according to Wikipedia. On December 16, 2015, however, she increased the Fed funds rate for first time since 2006. (In 2019 and 2020, under Powell, rates went back down.) Yellen reversed some of the policy responses to the subprime mortgage crisis of 2008. Notably, she oversaw a program to sell Treasury and mortgage bonds that the Fed had purchased to stimulate the economy.

Yellen may not have a lock on confirmation by the Senate. After what may have been the most bitter election since 1860, with Democrats and Republicans agreeing only that they couldn’t live with a government run by the other side, it’s unclear whether Senate Republicans will try to frustrate the Biden administration’s attempts to assemble a cabinet. On January 6, 2014, Yellen was confirmed as Fed chair by a 56-to-26 vote—the narrowest margin ever for that position.

© 2020 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on November 26, 2020 by -

ARA weighs in on ‘lifetime income illustrations’ in 401(k) plans

In a Nov. 17 comment letter on the Department of Labor’s interim final rule on lifetime income illustrations (LIIs), the American Retirement Association (ARA) offers support for the rule, but recommends changes in certain key areas.

The DOL rule, published in the Federal Register Sept. 18, came in response to the SECURE Act’s requirement for benefit statements to include a lifetime income disclosure containing “the lifetime income stream equivalent of the total benefits accrued with respect to the participant or beneficiary.”

As to whether the final rule should require illustrations based on multiple ages rather than a single age, the ARA contends that using a single uniform age balances the participants’ need for information with efficient provision of the required illustrations. Service providers generating LIIs may not have records of actual birth dates and requiring actual ages for participants would add considerable cost and complexity.

The letter further suggests that the LIIs should explain that the fixed nominal annuitized income streams present will have declining purchasing power over time—that is, it should be made clear that the LIIs are predicting the actual anticipated stream of payments, ARA said.

ARA suggests prominent placement of the rule’s explanation that the monthly payment amounts in the LIIs “are fixed amounts that would not increase with inflation” and that “as prices increase over time, the fixed monthly payments will buy fewer goods and services.” The ARA further requests clarification of the rule’s requirement that the determination of a participant’s account balance include the outstanding balance of any participant loans unless the participant is in default on such loan.

The ARA also cited concerns that by creating a safe harbor for these DOL-prescribed disclosures, there may be a perception that other disclosures (for example, those made in connection with website planning tools) may result in fiduciary liability simply because they have not been accorded a comparable safe harbor status.

Among the ARA’s other recommendations is clarification of the timing of the first benefit statement that is required to include a LII. The IFR is effective on Sept. 18, 2021, and applies to pension benefit statements furnished after such date. Since the LII must only be included in one pension benefit statement during any one 12-month period, the ARA recommends that the first benefit statement that must include a LII should be in the second quarter of 2022.

Barbara Turner becomes Ohio National’s first female CEO

Barbara Turner

Barbara A. Turner has been elected president and chief executive officer of Ohio National Financial Services by the board, effective January 1, 2021. Previously she was president and chief operating officer.

Turner succeeds Gary T. “Doc” Huffman effective January 1, 2021. Huffman served a chief executive for 12 years and continues as chairman of the board. Turner is Ohio National’s 11th president and the first woman and person of color to serve in this role since its founding in 1909.

She joined Ohio National in 1997 and has served as Ohio National’s president and chief operating officer since November 2018. Among other positions, Turner has led Ohio National’s annuities strategic business unit, served as chief administrative officer, and serving as president and chief executive officer of The O.N. Equity Sales Company (ONESCO), the company’s affiliated broker/dealer. Under her leadership, ONESCO experienced historic growth and profitability and was recognized as a top broker/dealer in the country by Financial Planning magazine. Additionally, ONESCO’s client assets grew to over $8 billion.

Huffman joined Ohio National in August 2008 as vice chairman, distribution, and advanced to vice chairman and chief operating officer in November 2009. Under his leadership, enterprise GAAP assets increased 60% to $39.7 billion and GAAP equity increased 66% to $2.9 billion. Domestic life insurance direct total premium and fees increased 130% to $1.14 billion and domestic disability income insurance direct total premium increased 30% to $45.3 million.

Congress should support PPP tax relief: AICPA

The American Institute of CPAs (AICPA) this week called on its member accountants to ask Congress to pass S.3612 and H.R.6821 (the Small Business Expense Protection Acts of 2020), or H.R. 6754 (the Protecting the Paycheck Protection Program Act).

The bills would ensure that receipt and forgiveness of PPP assistance does not result in an unexpected and burdensome tax cost. “CPAs are now assisting business and individual clients with year-end tax and cash flow planning which is critical not only for filing 2020 returns, but also to determine their operating needs for 2021; planning in the midst of coronavirus-induced economic uncertainty is particularly important,” said AICPA Vice President of Taxation, Edward Karl, CPA, CGMA, in a release.

The CARES Act stated that any loan forgiveness under the program would be excluded from the borrower’s taxable income. Although Congress clearly intended to allow the deductibility of expenses related to loan forgiveness, the statute was silent on that point. The publication of IRS Notice 2020-32, and more recently Rev. Rul. 2020-27, settled this policy by denying borrowers the ability to deduct the same expenses that qualified them for the loan forgiveness.

© 2020 RIJ Publishing LLC. All rights reserved.

 

Annuity Sales Rebound in Third Quarter: WinkIntel

Posted on November 25, 2020 by -

Total sales for all deferred annuities were $54.2 billion in third-quarter of 2020; an increase of over 18.0% when compared to the previous quarter and a decline of 1.1% when compared to the same period last year. “Sales are up for all product lines from last quarter, but sales compared to last year are still down double-digits for most annuity types,” said Sheryl J. Moore, president and CEO of both Moore Market Intelligence and Wink, Inc.

Sales of multi-year guarantee annuities, or MYGAs, and of structured annuity (registered indexed-linked annuities or RILAs),  were up by double-digits from a year ago, however.

The Wink’s Sales & Market Report for the third quarter is based on sales data from 62 indexed annuity providers, 47 fixed annuity providers, 69 multi-year guaranteed annuity (MYGA) providers, 13 structured annuity providers, and 46 variable annuity providers.

Jackson National Life was ranked first in deferred annuity sales, with a market share of 8.4%. Jackson National’s Perspective II Flexible Premium Variable & Fixed Deferred Annuity, a variable annuity, was the top selling deferred annuity, for all channels combined in overall sales for the seventh consecutive quarter. Sammons Financial Companies, AIG, Lincoln National Life, and Athene USA followed. out the top five carriers in the market, respectively.

Total third quarter non-variable deferred annuity sales (fixed and fixed indexed annuities) were $30.9 billion; up 19.5% from the previous quarter and up 7.1% from the same period last year.  Sammons Financial Companies was the top seller of non-variable deferred annuity sales, with a market share of 12.4%. Athene USA, AIG, Massachusetts Mutual Life, and Global Atlantic Financial Group followed. MassMutual’s Stable Voyage 3-Year, a multi-year guaranteed annuity, was the top-selling non-variable deferred annuity, for all channels combined in overall sales for the second consecutive quarter.

Total third quarter variable deferred annuity sales (variable and structured annuities) were $23.2 billion, up 15.6% from the previous quarter but down 10.4% from the same period last year.  Jackson National Life ranked as the top carrier overall for variable deferred annuity sales, with a market share of 19.1%. Lincoln National Life, Equitable Financial, Brighthouse Financial, and Prudential followed. Jackson National’s Perspective II Flexible Premium Variable & Fixed Deferred Annuity, a variable annuity, was the top-selling variable deferred annuity, for all channels combined in overall sales for the seventh consecutive quarter.

Indexed annuity sales for the third quarter were $13.7 billion; up 7.5% from the previous quarter, and down 26.1% from the same period last year. Indexed annuities have a floor of no less than zero percent and limited excess interest that is determined by the performance of an external index, such as Standard and Poor’s 500. Athene USA retained top ranking in indexed annuity sales, with a market share of 11.0%. Allianz Life,  Sammons Financial Companies, AIG, and Fidelity and Guaranty Life followed. Allianz Life’s Allianz 222 Annuity was the #1 selling indexed annuity, for all channels combined, for the twenty-first consecutive quarter.

Traditional fixed annuity sales in the third quarter were $488.57 million, up 14.7% from the previous quarter, and down 32.7% from the same period last year. Traditional fixed annuities have a fixed rate that is guaranteed for one year only. Modern Woodmen of America was top seller of fixed annuities, with a market share of 14.4%. Global Atlantic Financial Group,  EquiTrust, Jackson National Life, and National Life Group followed. The Forethought Life ForeCare Fixed Annuity was the top-selling fixed annuity, for all channels combined.

Multi-year guaranteed annuity (MYGA) sales in the third quarter were $16.6 billion, up 32.9% from the previous quarter, and up 69.7% from the same period last year. MYGAs have a fixed rate that is guaranteed for more than one year.  Sammons Financial Companies ranked as the top seller, with a market share of 16.5%. MassMutual, New York Life, Global Atlantic Financial Group, and AIG followed. MassMutual’s Life Stable Voyage 3-Year was the top-selling multi-year guaranteed annuity contract for the fourth consecutive quarter, for all channels combined.

Structured annuity sales in the third quarter were $6.2 billion, up 38.1% from the previous quarter, and up 30.4% from a year ago. Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or subaccounts. Lincoln National Life was the top seller of structured annuities, with a market share of 24.5%. Allianz Life, Equitable Financial, Brighthouse Financial, and Prudential followed. Lincoln National Life Level Advantage B Share was the top-selling structured annuity for the third consecutive quarter, for all channels combined.

Variable annuity sales in the third quarter were $17.0 billion, up 9.1% from the previous quarter but down 19.6% from the previous year. Variable annuities have no floor, and potential for gains/losses that are determined by the performance of the subaccounts that may be invested in an external index, stocks, bonds, commodities, or other investments.

Jackson National Life remained the top seller of variable annuities, with a market share of 26.1%. Equitable Financial,  Nationwide, New York Life, and Lincoln National Life followed. Jackson National’s Perspective II Flexible Premium Variable & Fixed Deferred Annuity was the top-selling variable annuity for the seventh consecutive quarter, for all channels combined.

“Structured annuities continue to experience record sales in a linear fashion, but appear to be accelerating sales at a pace that is more swift than indexed annuities, at their same point in the annuity product life cycle,” Moore said in a release. “Continued increases in sales of these products will reduce the deferred annuity market share that is attributable to both variable and indexed annuities.”

Wink reports on indexed annuity, fixed annuity, multi-year guaranteed annuity, structured annuity, variable annuity, and multiple life insurance lines’ product sales. Sales reporting on additional product lines will follow in the future.

(c) 2020 RIJ Publishing LLC.

Time to overweight equities: BlackRock

Posted on November 25, 2020 by -

We upgrade US equities to over-weight, with a preference for quality large caps riding structural growth trends as well as smaller companies geared to a potential cyclical upswing. We prefer to look through any near-term market volatility as Covid cases surge. Positive vaccine news reinforces our outlook for an accelerated restart during 2021, reducing risks of permanent economic scarring. The pandemic has accelerated some key structural trends, such as increased flows into sustainable assets and the dominance of big tech companies.

The US market has a favorable sector composition compared with other major equity markets. It boasts a higher share of quality companies – those with strong balance sheets and free cash flow generation – in sectors backed by long-term growth trends such as tech and healthcare.

Information technology and communication services represent nearly 40% of the market value of the MSCI USA Index, compared with just 11% in Europe. See the chart at right. The US tech sector is about more than just the handful of mega-caps that have led market performance in recent years and face heightened regulatory scrutiny. Semiconductor and software companies, for example, face few regulatory risks and enjoy long-term growth trends.

The financial sector – under pressure from the low interest rate environment globally – represents a relatively small slice of the US market in comparison to Europe. Markets have been weighing a near-term resurgence in Covid cases against advancing vaccine development. We expect rising infections and new restrictions to cause activity contraction in Europe in the fourth quarter, with the US close behind.

Meanwhile China is set to return to its pre-Covid growth trend thanks to better virus control, boding well for the rest of Asia and emerging markets (EMs). The challenging months ahead in the US and Europe could support the case for further outperformance of large-cap tech and healthcare companies.

At the same time, prospects for an accelerated economic restart during 2021 could favor more cyclical exposures. Should investors stick to quality – a perennial recent winner – or rotate into beaten down cyclical exposures?

We believe this is not an “either/or” question – and advocate a more nuanced approach. A “barbell” strategy that includes allocations on one side to quality companies benefiting from structural growth trends; and on the other to selected cyclical exposures. This can help achieve greater portfolio resilience amid still high levels of uncertainty about vaccine deployment and the prospects for further pandemic relief, we believe.

Our tactical upgrade to US equities and long-held preference for the quality factor are how we choose to gain exposure to structural growth. We take a selective approach to cyclical exposures, with over-weights in EM equities; Asia ex-Japan equities and the US size factor, which tilts toward mid- and small-cap companies. EMs should benefit from a global cyclical upswing in 2021 as well as more predictable US trade policies under President-elect Joe Biden.

The size factor is geared to a US cyclical upswing. We prefer avoiding more structurally challenged cyclical exposures. We have downgraded European equities to underweight and hold an underweight in Japanese equities. The European market has a relatively high exposure to financials, which we see pressured by low rates. Japan may not benefit as much as other Asian countries from a cyclical upswing, and could see its currency driven up by a weaker dollar – a result of monetary easing and more stable trade policy under a Biden administration.

Bottom line: We see the vaccine development providing a constructive backdrop for risk assets as we approach 2021, but advocate a balanced approach: quality companies that should outperform even if fiscal support disappoints; and selected cyclical exposures that are likely to thrive as the timeline for widespread vaccine deployment advances.

A key risk to our US equities view: The winding down of key Fed/Treasury emergency support facilities by the US Treasury highlights risks ahead for overall US policy support, especially on additional fiscal relief.

Markets have been weighing the near-term Covid resurgence against positive news on long-term vaccine development. Effective vaccines would allow a broader opening-up of activity sooner and reduce the risk of long-term scarring. This reinforces our view that the cumulative economic hit from the Covid shock will be just a fraction of that seen in the wake of the global financial crisis. Yet we do see potential for near-term disruption to the economic restart caused by the ongoing virus resurgence and government restrictions.

© 2020 BlackRock Investment Institute.

Can Annuities Slow the Cash-Drain from 401(k)s?

Posted on November 19, 2020 by -

As they convened virtually for their annual Academic Forum this week, members of the Defined Contribution Institutional Investors Association (DCIIA) faced a stubborn problem: the gradual but unremitting drain of money from 401(k)s and other qualified savings accounts.   

DCIIA members include asset managers that distribute target date funds and other mutual funds through employer-sponsored plans. It’s a multi-trillion dollar business involving some of the world’s biggest financial firms.

When participants change jobs, retire, cash out their plan balances, or take loans from their accounts, money leaves the retirement plans. Much of that money rolls over into IRAs at brokerage firms. That’s good for brokers, but it’s terrible for asset managers that don’t have their own rollover businesses.

It’s arguably bad for participants too. First, they may end up with paltry 401(k) balances when they finally do retire. Also, products and services at brokerage firms tend to cost more than in 401(k) plans, for the simple reason that the Department of Labor oversees 401(k) firms but the SEC oversees brokerage firms. (The Obama DOL tried to exercise authority over rollover IRAs with its 2016 fiduciary rule but that rule was shot down in court and left to die by the Trump DOL.)

Since so many financial services firms have fingers in so many different products, it’s hard to tell who gets hurt and to what extent. There are partial winners and partial losers. Fidelity and Vanguard are considered immunized because they offer retirement plans and brokerage IRAs.

One way to make 401(k) money stay in 401(k) accounts would be to sell participants annuities and make them customers for life. That’s why life insurance companies spent five years pushing for the passage of the SECURE Act, which includes provisions to make it easier for plan sponsors to allow annuities into their investment lineups for participants.

Principal Financial Group’s announcement this week (see story in today’s issue of RIJ) of plans to offer a Pooled Employer Plan (PEP) in 2021 is evidence of the SECURE Act in action. The SECURE Act enabled PEPs, which are 401(k) plans that lots of small and mid-sized employers can join.

Principal’s PEP will offer, as an option, Principal’s Pension Builder deferred income annuity (DIA). Principal’s life insurance company created this annuity five years ago. But the market wasn’t as ready then as it is now. An employer joining this PEP will not have to shop around and get bids from different annuity issuers; it can offer Pension Builder.

That’s because Principal, as the Pooled Plan Provider (or general contractor of the plan) has partnered with Wilshire, the big defined contribution plan asset manager. Wilshire will serve as the so-called 3(38) investment fiduciary. As such, Wilshire picked Pension Builder to offer as an investment option. National Benefit Services will be the 3(16) administrator of the plan. (If this sounds complicated, it is.)

The PEP provision in the SECURE Act does not explicitly make it easier to bring annuities into plans, but that may be an effect. It may be more compelling than the SECURE Act’s “safe harbor,” which introduced a not-very-stringent procedure that individual plan sponsors can use to satisfy their fiduciary duties when selecting an annuity provider.

The future of in-plan annuities is likely to involve target date funds. TDFs account for a big percentage of plan assets now. Participants can be defaulted into them. A TDF can be converted to an in-plan annuity option by wrapping a guaranteed lifetime withdrawal benefit around it or tying it to the purchase of a DIA at retirement.

The still-unanswered question is this: Do participants want annuities? Industry-sponsored surveys show that many participants want pension-like income in retirement. But they don’t necessarily want to pay for it themselves, and they won’t necessarily accept the illiquidity of the contracts. In Pension Builder, participants can liquidate their DIAs, but not without a haircut.

The paradox facing would-be in-plan annuity providers is that the participants who would best benefit from them have the least interest in them. As Michael Finke of The American College pointed out during his presentation at the DCIIA Academic Forum this week, a recent survey showed that people who are college-educated, married, with retirement savings greater than $250,000, are the least likely to say they would allocate 50% of their 401(k) balance to a guaranteed income stream.

So even if annuities make it into a majority of 401(k) plans as an everyday option, will the optimal client opt into them? Getting the SECURE Act passed, as hard as it was, may have been the easier part.

© 2020 RIJ Publishing LLC. All rights reserved.

Watching the Fed Watch Covid-19

Posted on November 19, 2020 by -

The Fed has positioned itself in such a way that its next move seems obvious and that it will ease policy further by some means sooner than later—with sooner being the December FOMC meeting. Expectations are moving in the direction of the Fed shifting asset purchases toward the longer end of the curve. Not to be outdone, some shops are expecting the Fed to increase the pace of asset purchases.

I have some nagging doubts about this narrative. Here I am going to outline those doubts and hopefully provide some context. Six facts are central elements to the growing narrative:

  1. As in the last cycle, the Fed forecasts that inflation will remain below target for a protracted period of time. So the Fed should take further action to support the economy and accelerate the return to target. They haven’t yet, but presumably could.
  2. Fed officials have expressed concerns about the dual downside risks of a Covid-19 surge and insufficient fiscal support. Both of those events look more like reality than risks.
  3. The Fed has also expressed concerns about inequalities and permanent job loss arising from the pandemic recession. Federal Reserve Chair Jerome Powell reiterated these points. There seems to be no point in complaining about such issues yet still hold policy steady.
  4. The Fed believes their tools remain effective. On Monday Federal Reserve Vice Chair Richard Clarida pointed to interest rate sectors of the economy as evidence that monetary policy was just as effective in this cycle as in past cycles.
  5. Federal Reserve Governor Lael Brainard said in October that “in the months ahead, we will have the opportunity to deliberate and to clarify how the asset purchase program could best work in combination with forward guidance to support achievement of maximum employment and 2% average inflation.”
  6. With interest rates at zero and the Fed dismissive of yield curve control, the primary tool available to the Fed is the asset purchase program. The Fed discussed possible extensions of the asset purchase program at the November FOMC meeting.

The path from those acts to some type of action at the December meeting seems straightforward. So what’s eating at me?

First, I don’t know entirely how to interpret Powell’s dovishness. I think he is rightly concerned that showing optimism will lead market participants to erroneously conclude that the Fed is closer than expected to hiking rates. He is genuinely committed to sustained accommodative monetary policy. Even if the US recovery remains intact this winter, the economy will still be in a hole with high unemployment. I don’t think he wants to blunder into a “taper tantrum” and slow progress toward the Fed’s goal.

That said, if Powell is concerned about inequality or long-term labor market damage, why hasn’t he pushed his colleagues into expanding the pace of asset purchases? The situation now is no different from two or three months ago. I can only conclude that he views monetary policy as a poor substitute for fiscal policy at this point.

When Powell says the Fed has reviewed the asset purchase program and concluded that it is providing the appropriate amount of accommodation, he may be saying that increasing it will neither accelerate the recovery nor deal with the structural issues that concern the Fed. Why then would they do something in December that they have already concluded won’t help?

While Powell may be suppressing optimism, Clarida let the optimism fly as he revealed that the good news on the vaccine gave him

 “…more conviction in my baseline for next year and more conviction that the recovery from the pandemic shock in the US can be potentially more rapid, potentially much more rapid, than it was from the Global Financial Crisis…there is an enormous quantity of pent-up saving….so you [if] combine the good news on the vaccine with north of a trillion dollars of accumulated saving, then there is a very, very attractive right tail to this distribution.”

Could Powell see more upside risk than he is willing to admit?

Second, the Fed has not identified how the asset purchase program interacts with the Fed’s new strategy. The path of the asset purchase program and its relation to economic outcomes has not been tied down as the path of interest rates has. Powell said this at the November press conference:

EDWARD LAWRENCE. What would cause the Federal Reserve to shift more of its asset purchases towards the long-term securities and Treasuries and change the amount of spending there also? And, if there’s no fiscal stimulus package, would that trigger buying of more long-term assets or change the asset purchases?

CHAIR POWELL. We understand that there are a number of parameters that we have where we can shift the composition, the duration, the size, the life cycle of the program. All of those things are available to us as ways to deliver more accommodation… Right now, we like the amount of accommodation the program is delivering. It will just depend on the facts and circumstances.

What “facts and circumstances” were discussed? We don’t know. We can only assume that the “facts and circumstances” include addressing the negative impacts of a Covid-19 surge, but we don’t know that. Again, it appears the Fed has concluded that changing the asset purchase program would not accelerate the recovery. So why would they believe it could offset fresh pandemic weakness?

One obvious set of “facts and circumstances” would prompt the Fed to alter the asset purchase program: A financial disruption. And that brings me to my third concern. A financial hiccup would get the Fed’s attention and provoke a response. As of yet, however, there has been no financial disruption, despite the surge of cases across the nation.

The financial situation appears very different from this past spring. Then the markets quickly discounted the implications for the economy and stocks crashed while credits markets nearly froze. This time no such thing has occurred. Why? First, this will be “lockdown light.” It will have less significant economic impacts. Second, selling off is foolish because we know there will be a rebound on the other side. Third, market participants are looking through the short-term problems to the long-term solutions.

Whatever the reason, financial markets are not tightening. To be sure, longer term interest rates are edging higher, but that increase could be consistent with improving economic conditions, so it is not readily obvious the Fed would need to push back. This from Clarida was illuminating:

We are buying a lot of Treasuries, we’re buying $80 billion a month, that comparable to the path of QE2 and it’s roughly the duration pull…with long-term yield at historically low levels and below both current and projected inflation, financial conditions are accommodative…not concerned about the rise in Treasury yields and it is still in an accommodative range.

Those were not the words of someone interested in expanding asset purchases or changing the duration of the program to sit on the long end of the curve.

Bottom line: I don’t know that the Fed’s behavior with regard to the asset purchase program to date argues for changing the composition of purchases in response to feared renewed pandemic weakness.

If the Fed believed alterations to the program would affect economic outcomes in the current environment, they should already have changed the program. That outcome, though, seems more likely than expanding the pace of asset purchases.

Another possibility is that the Fed decides to clarify the length of the program to make is consistent with guidance on the interest rate. This seems like an easier call than other options.

The most likely reason to alter the asset purchase program would be to offset a tightening in financial markets. As of yet that doesn’t seem necessary. The upcoming minutes of the November FOMC meeting might reveal new information and the Fed’s discussion of the asset purchase program.

© 2020 Tim Duy.

Principal EASE, a New ‘PEP,’ Offers Income Option

Posted on November 19, 2020 by -

Taking advantage of provisions in the SECURE Act of 2019, Principal Financial Group will roll out a new Pooled Employer Plan (PEP) in 2021, marketing the Principal EASE multiple employer 401(k) plan to a range of employers, from start-ups with as few as 10 workers and to companies with as much as $10 million in existing plans.

Principal EASE will be a packaged 401(k) plan that combines integrated retirement plan administration, customer service and investment management services. Principal will serve as the Pooled Plan Provider (PPP), or oversee of the PEP, while National Benefit Services will be the third-party administrator (TPA) and Wilshire will handle the investments as a 3(38) fiduciary. (The numbers refer to B of the Employee Retirement Income Security Act of 1974, or ERISA.)

Congress created the SECURE Act in part to close the so-called retirement plan “coverage gap,” which refers to the fact that 40% or more of full-time workers in the US are at any given time without a tax-deferred payroll savings plan at work. The gap is especially prominent among small employers without the administration resources needed to sponsor a single-company 401(k) plan.

PEPs are intended to invite dozens or hundreds of small firms into a single turnkey plan that relieves the employer of all but a minor responsibility for selecting a legitimate provider. Principal, which operates 49,000 retirement plans in the US, would presumably fill the bill.

The SECURE Act does not require PEP providers to market only to firms without existing plans or to offer annuity options to participants. Principal plans to offer EASE to existing and prospective clients, and Wilshire will offer Principal’s Pension Builder deferred income annuity as an in-plan investment option.   

Joni Tibbetts

“We will make the PEP available to our existing clients,” Joni Tibbetts, vice president of project management at Principal, told RIJ. “But EASE is focused on simplifying the choices for participants, and our existing clients won’t necessarily want to make that kind of change. Principal is indifferent to whether [a current plan client] joins the PEP or not.” In 2019, Principal acquired Wells Fargo’s Institutional Retirement and Trust business, becoming one of the largest retirement plan providers in the US.

Another goal of the SECURE Act was to help small companies enjoy the same high level of services and economies of scale that large companies typically enjoy when obtaining 401(k) services. In the past, small company plan participants often paid higher fees than large company plan participants.

That’s important, because a 1% fee difference over 30 years of saving can reduce a participant’s retirement plan balance by 30%, as behavioral economist Shlomo Benartzi of UCLA has pointed out. Principal is looking to serve firms with prospective annual 401(k) contributions of as little as $50,000. Before the SECURE Act, such firms could find boutique turnkey 401(k) providers or use SIMPLE 401(k)s, but demand for those options has not closed the coverage gap.

Principal declined to say what the EASE fees would be. “While we are unable to share fees for Principal EASE, they will be competitive for the value of the service package that’s being provided,” a Principal spokesperson said.

Principal’s in-plan deferred income annuity (DIA) for 401(k) plans, Pension Builder, will be one of the investment options approved and offered by Wilshire to PEP participants, Tibbetts told RIJ.  Each company in the PEP will decide for itself whether to offer Pension Builder to participants or not. The DIA would have “institutional pricing,” she said.

principal chart 11-19-20

A hypothetical illustration of Pension Builder, from a Principal brochure.

Principal launched Pension Builder five years ago. It is a flexible-premium, unisex-priced, individual deferred income annuity (DIA) contract offered as a stand-alone investment option for plan participants. Contributions to the DIA go into the general account of the life insurance company, in this case Principal Life. Each contribution purchases a discrete amount of guaranteed income for life. 

Participants who own Pension Builder contracts can roll them over penalty-free and tax-free if they change jobs, as stipulated by the SECURE Act, and retirees can choose to take lump sums instead of accepting the annuity. There may be surrender charges or value adjustments on lapsed policies, however, according to a PEP brochure. 

The fact that Principal is the PPP and that its PEP offers a bundled Principal annuity product doesn’t present a conflict of interest, Tibbetts said. That’s because Principal doesn’t select itself as the annuity provider; Wilshire does. The employer can fulfill its fiduciary burden by following the requirements of the optional “safe harbor” procedure for annuity selection outlined in the SECURE Act. The employer also relies on the recommendations of the 3(38) fiduciary, Wilshire. 

Principal offers this disclosure in its press release: “Wilshire and National Benefits Service are not an affiliate of any member of the Principal Financial Group. The decision to delegate to and ongoing monitoring of the Pooled Plan Provider (PPP) and 3(38) investment manager is the fiduciary responsibility of the adopting employer.”

Tibbetts has a clear mental image of the ideal small-business candidate for the Principal PEP: Her cousin the woodworker. “My cousin is a cabinetmaker,” she told RIJ. “He has a group of about 20 employees. I brought up the subject of PEPs with him and his wife at a family function. And when I testified about RESA [an early version of the SECURE Act] on the Hill I used them as an example of our target client.”

© 2020 RIJ Publishing LLC. All rights reserved.

Checklist for Buying Cash Value Life

Posted on November 19, 2020 by -

Product selection
  • What kind of policy fits the situation, both in terms of the usage of the policy and the client’s ability to understand and accept the attendant risk? 
  • Does the policy owner understand the policy and strategy?
  • Will the policy design fit the intended investment risk strategy for the retirement planning situation?
  • Will the policy have sufficient flexibility to accomplish the strategy?
  • What triggering events in the policy will accomplish the retirement strategy?
Policy illustration
  • Does the prospective buyer understand the functions and risks of the proposed product? 
  • Can you provide independent articles to help the purchaser understand the differences between types of policies? 
  • Can you provide independent articles on using the policy in a retirement income strategy
Plan integration
  • Does the client understand how the policy strategy integrates with his or her overall portfolio and plan?
  • In a buy-sell situation, how will the policies be owned (entity versus cross purchase)?
  • In an individual retirement situation, how will the policy’s withdrawals and loans coordinate with the client’s overall asset location and income withdrawal strategy?
  • In the case of company-owned life insurance (COLI) deferred compensation situation, how will the policy’s sub-accounts be coordinated with the executive’s investment selections?
Plan implementation 
  • Are the ownership and beneficiary designations correct? 
  • Has the policy placement process coordinated with other legal necessities?
  • Has the insurance advisor worked with other professional advisors in coordinating the life insurance policies with the retirement strategy?
Plan administration 
  • Has an approach been established for monitoring and reviewing the plan with the client and other professional advisors?
  • Have triggers and procedures been established for implementation of the strategy upon the insured’s retirement, particularly where the owner is not the insured?   
  • Would it be better to annuitize the cash value using either the policy features or a 1035 exchange?
  • Once the policy has moved into the income stage, will automated procedures accomplish the strategy?
  • Cessation of premium payments
  • Continuous payments made from the insurer to the policy owner
  • Switching from death benefit B (increasing) to A (level)
  • Switching from withdrawals to loans once basis has been withdrawn from the policy
  • A method to prevent the policy from lapsing when policy values are exhausted (reduced paid-up, etc.)
Practice management
  • Is the advisor complying with regulations pertinent to the presentation and sale of life insurance such as NY Reg 187, Reg BI, etc.? 
  • Is there a process in place for monitoring insurance company changes and their possible effect on in-force policies? 
  • Is the advisor monitoring for impaired financial ratings, mergers, cost of insurance (COI) changes, etc.?
  • Is the advisor requesting annual in-force illustrations in order to monitor policy performance?   
  • Is there a process for monitoring changes in tax policy and its attendant effect on the retirement plan? 
  • Is there a process for monitoring changes in the client’s financial situations and the attendant effect on the anticipated retirement plan? 

© 2020 Steve Parrish. Used by permission.

Using Cash Value Life Insurance for Retirement Income

Posted on November 19, 2020 by -

Can cash value life insurance provide a useful retirement income supplement? It depends on whom you ask. Thirty years ago, I purchased a high cash value whole life policy, using my annual bonus to pay each year’s premium. When I reached retirement age, I made a tax-free exchange of the policy values into an immediate annuity that pays out a lifetime income for me and my wife.

But it doesn’t necessarily work for everyone. I met a physician recently who complained that an agent had sold him a “basket full of whole life policies” to generate tax-free income in retirement. The agent vanished, so the doctor surrendered the policies, paying a hefty tax on the gain.

There was a big difference between my situation and the physician’s, however. My policy was part of a retirement plan. His resulted from a life insurance sale with apparently little follow-up. Too often, life insurance is merely a sales idea with no real follow-up once the policy is delivered. Life insurance as a retirement strategy requires ongoing communication and administration.

While most retirees use life insurance for its death benefit, cash value life insurance policies can:

  • Serve as a source of funding during the insured’s lifetime and a strategy in retirement planning.
  • Pay out a tax efficient stream of income for a period of years through withdrawals and loans.
  • Supplement an individual’s retirement income when heavily funded;
  • Fund a non-qualified deferred compensation benefit for an executive (when a corporate owned life insurance policy, or COLI;
  • Buy out a retiring owner’s stock in buy-sell situations.

Steve Parrish

In this article, I propose that advisors use this checklist, or one like it, to assure proper execution of the plan. Any checklist should cover the acquisition of the policy, the implementation of the plan during pre-retirement years, and the decumulation of values during retirement. Ongoing administration of the plan and attention to detail are essential.

Policy acquisition

Clients, whether individual or corporate, will need help choosing an appropriate policy, both in terms of its use and its risks. For example, a variable universal life (VUL) policy requires more education and decision-making than does a whole life policy. With VUL policies, the policyowner controls the investment of the cash value. With whole life, the insurer controls it.

The advisor must also ask if the policy design fits the intended investment risk strategy for the client’s retirement plan. The advisor should also confirm whether the retirement strategy will use the policy as an uncorrelated buffer asset (a case for whole life) to mitigate sequence risk or, as vehicle for tax deferral (a case for VUL).

Another important question: Is the contract flexible enough? For example, if the owner wants a monthly retirement income when he or she starts decumulating the policy, can the insurer automate these payments? A written withdrawal request to the insurer every month would be unwieldy.

The advisor also needs to determine if the policy has the right triggering points to accomplish the retirement strategy. If the purchaser plans to use the policy for a voluntary retirement, many cash value products will work. If, however, the policyowner wants access to payments for disability or long-term care, the policy will require additional riders or policy features.

During the policy acquisition process, it will be hard to tell how the policy will perform. Cash value life insurance designs are often difficult to understand, and the illustrations vary by product type. For example, from a regulatory standpoint, a whole life policy uses a different illustration regime than, say, an indexed universal or variable universal policy. Some policies are considered securities under state and federal law; others are not. This can lead to apples-to-oranges comparisons. An advisor will need to take extra steps to explain and demonstrate the life insurance retirement income strategy to a prospective client.

The purchaser must also determine how the policy strategy will integrate with the client’s overall portfolio and plan:

    1. In a buy-sell situation, the business needs to determine from the outset whether the policies will be owned individually by the business owners (a cross purchase buy-sell) or by the business itself (an entity buy-sell).
    2. In an individual retirement situation, the prospective retiree should coordinate policy withdrawals and loans with their overall asset location and income withdrawal strategy. If the cash value withdrawals provide an income bridge while the owner defers filing for Social Security, the policy funding must have sufficient cash values for that purpose.
    3. In a non-qualified deferred compensation situation, the company will typically own variable life insurance policies. They will want to match, at least roughly, the policy’s sub-accounts with the investment crediting strategy for the participating executives. Otherwise, the company’s liability to its executives won’t match the funds in the policies.
Plan implementation

Before any policy is actually issued and placed, certain legal issues must be addressed. When life insurance is used to buy out a retiring owner of a business, at least three legal issues arise.

First, to avoid income tax on a transfer for value, the advisor must determine if the business will own the policy or if it will be cross-owned by a business owner. If the policy is corporate owned, the notice and consent formalities of IRC Section 101(j) should be considered. Finally, the existence of the policies and their intended use should be documented in the buy-sell agreement.

If the life insurance will reside in an irrevocable life insurance trust, the policy should be issued, not transferred, to the trust in order to avoid estate inclusion under IRC 2035. Beneficiary designations should likewise be determined in advance.

While buying life insurance always requires the expertise of a licensed agent, help from attorneys and accountants will likely be needed to implement the plan. One of these professionals needs to be responsible for using a checklist to coordinate their activities.

Plan administration

When life insurance-based retirement strategies break down, poor administration and communication is often the cause. When a licensed insurance agent receives a heaped commission for placing the policy, that can be a disincentive to ongoing administration.

While the client’s attorney may be on retainer, he or she may not have the technical expertise to administer the life insurance plan. In some cases, execution of the plan may require the services of a specialist who earns a separate fee for services provided.

Other primary elements to include in a checklist for proper plan administration are:

  • Monitoring and reviewing the plan with the client and other professional advisors
  • Establishing triggers and procedures for implementation of the strategy upon the insured’s retirement
  • Determining the amounts and timing of withdrawals when the policy is ready to be used for retirement income

In an individual client scenario, for example, the insured owner may choose to target policy withdrawals to avoid adding to taxable income (thus avoiding the NII tax, Medicare Part B increases, or Social Security covered compensation tax). In a corporate situation, the company’s advisor should determine which is more or less expensive: To access policy values or use the company’s own capital. If capital is inexpensive, waiting and using the life insurance for its death benefit may be better.

Once income withdrawals begin, the advisor should find out if the life insurer can automate the withdrawals. For example, can premiums cease and monthly payments begin automatically? When decumulation of a universal life policy begins, the owner should ideally switch from an increasing death benefit to a level one. This is often a predetermined step. It maximizes the value of the life insurance in retirement income planning. Who will be responsible for making this switch?

Further, withdrawals of the cash value should be made only until the owners recover their tax basis, and they should take future drawdowns from the policy as loans. If the insurer doesn’t offer these services, the advisor will need to help.

Every plan will need lifelong monitoring. The insurance company should be monitored for impaired financial ratings, mergers, or changes in its internal pricing of in-force policies. Tax law changes should be examined for effects on the retirement plan. And, of course, the client’s individual situation should always guide the execution of the plan. The life insurance policy ultimately represents a death benefit, and a change in the insured’s health status may alter the decision to use the death benefit or the cash value strategy.

Advisors will have their own approaches to fulfilling their duties related to a client’s retirement strategies. For the use of cash value life insurance in retirement planning, this checklist may be a useful tool. Applied throughout the period of accumulation and decumulation of the cash value life insurance contract, the checklist will help ensure the success of the retirement strategy.

© 2020 RIJ Publishing LLC. All rights reserved.

The AAA’s Panel on the SECURE Act

Posted on November 12, 2020 by -

With Mark Iwry of the Brookings Institution and Greg Fox of Aon, I had the privilege last week of being a panelist in a webinar on the implications of the SECURE Act. The webinar was sponsored by the American Academy of Actuaries. AAA actuary Noel Abkemeier moderated.

The SECURE Act and I have a cautious relationship. When it first appeared, and I saw that it would allow unrelated small companies to “band together” to buy retirement plan services at scale. Somehow that didn’t sound plausible.

I asked a number of knowledgeable people, and they assured me that the Act didn’t mean that companies would band together. It meant that retirement services providers could offer a single plan to many unrelated employers at a time. 

So, why did the legislators use the expression band together? My sources looked at me blankly. Was I born last night? The wording of all legislation is crafted in such a way, they said. If the legislation said, “The bill will help asset managers and life insurers achieve additional scale in the fragmented 401(k) business by replacing employers as plan sponsors,” it probably wouldn’t pass.

My role on the AAA panel was to report on the implications of the SECURE Act for life insurers. I believe with many others that the Act will be a game-changer for the retirement industry, especially because of the band-together provision, but not necessarily for life insurers—at least, not in the short run.

To be sure, some life insurers with existing ties to the 401(k) business (as plan administrators and recordkeepers) will move quickly into this space. Lincoln, Principal, Prudential and Nationwide, which are life insurers and retirement plan service providers, have already announced new annuity products for this market. (Prudential has continuously marketed its IncomeFlex product for over a decade.) I assume that they’ll market annuities to the plans they administer.

Empower, which still has a Great-West life insurance sibling even after selling its individual annuity business to Dai-ichi’s Protective Life, recently inked a deal to provide record keeping services for Mercer’s PEP (pooled employer plan), Mercer Wise 401(k). MassMutual, whom I expected to play in this space, sold its retirement business to Empower this fall. I have not been able to reach MassMutual for comment.

Some life insurers have already been providing annuities to asset managers that market target date funds. Lincoln, Equitable, Prudential and Nationwide have long attached lifetime income riders to AllianceBernstein’s target date fund (TDF), in a complex framework where three insurers bid each month to wrap their guarantee around contributions from workers invested in TDFs. United Technologies has used the AllianceBernstein program for a decade. 

Other TDF providers, like BlackRock, Wells Fargo, and State Street Global Advisors are all assessing the 401(k) market, with varying degrees of development. They’re looking to partner with a life insurer on a TDF/annuity combination. TDFs are essential, because they are Qualified Default Investment Alternatives. Employers can auto-enroll employees into TDFs and, crucially, auto-enroll them into the living benefit rider when they reach, say, age 50.

So far I haven’t heard much from TDF providers like Capital Group American Funds, T. Rowe Price, Fidelity, or Vanguard on this topic. I’m not sure what how they view the opportunities created by the Act. Fidelity has an out-of-plan income annuity purchasing platform on its website, to which its own advisers can send clients.

Vanguard ended the relationship between its 401(k) plans and Income Solutions, the independent platform where retiring participants could solicit bids from several income annuity providers. But Vanguard and Fidelity have big rollover IRA businesses, so they don’t need to steer participants into lifetime income products in order to hold onto their money after they retire.

The SECURE Act has three elements that smooth the road toward incorporation of annuities in 401(k) plans. (Participants in 403(b) plans at non-profit organizations had long had access to group annuities, such as that pioneered by TIAA at colleges and universities.)

The first and most important component is a “safe harbor” that makes clear (somewhat more clearly than in the past) the steps that employers may follow to fulfill their responsibility as fiduciaries to choose a life insurer that is likely to be in business for the long haul. For me, this safe harbor is both too much and not enough.

It’s not enough, because it still leaves employers with some fiduciary responsibility (thus perhaps giving them reason to join a PEP). It’s also too much. It only requires employers to limit their search to life insurers that have been around for at least seven years and it allows plan sponsors to offer any type of annuity to their participants.

The lawyers for life insurers, who crafted crucial parts of the Act, are presumably satisfied with this language. But if I were a plan sponsor, I’d be looking for a life/annuity company with a 100-year track record. 

The other two pro-annuity planks of the Act involve ensuring the portability of annuity contracts and giving all participants access to a lifetime income calculator. Portability allows participants to put their annuities into rollover IRAs when they change jobs. The requirement that plan provider offer participants a calculator that reveals the amount of income that participants’ 401(k) current balances would produce today will probably have no effect. Participants ignore disclosures and the income forecaster on the Department of Labor’s website already fills the bill.

The Act puts no limits on the kind of annuities that plan sponsors can offer. That’s very broad. A Biden administration—Bernie Sanders was asked on a network news program last night if he’d accept an offer to run the Labor Department—is likely to feel the way that the Obama Administration felt about fixed indexed and variable annuities.

The Obama DOL wanted to remove the caveat emptor standard for selling those products to retirement savers. The life/annuity industry defeated the effort in court, but the battle over the “fiduciary rule” has never really ended.

I am a bit skeptical about the prospects of the industry’s favorite income product for 401(k) plans. That’s the aforementioned TDF with the guarantee lifetime withdrawal benefit (GLWB) rider. The product has great appeal to the industry life insurers and asset managers because it keeps money in the plan (instead of being rolled over to a brokerage IRA) and it provides steady fee income.

But the most important advantage is that participants can be auto-enrolled into the TDF at enrollment and then auto-enrolled into the income rider a decade or more before they retire—and perhaps a quarter-century before they reach age 75 and have to start taking money out of their tax-deferred accounts.

In other words, participants might pay a 1% annual fee for 25 years for a benefit that some people will drop before using it. (The typical in-plan lifetime income benefit allows contract owners to turn on an income stream that can’t shrink unless they make excess withdrawals and that will last as long as they live.) In a fee-conscious 401(k) environment, will many employers commit themselves to that? Some already have, I’m told.

A more consumer-friendly alternative might be something like the SponsorMatch program that MetLife and Barclays Global Investors proposed before the Great Financial Crisis of 2008. It had two sleeves. Employers would contribute their match (say, 3% of salary) to the purchase of a pension-like deferred income annuity for each participant. A participant’s own contributions would go into investments, as they do today. I liked that concept.

© 2020 RIJ Publishing LLC. All rights reserved.